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UNIVERSITY OF NEW BRUNSWICK

ECON 1013 Principles of Microeconomics

Final Exam Winter 2017

Duration: 2 hours and 30 minutes

Name:

Multiple Choice Questions

Please circle one correct answer. Each problem is worth 1 point.

1. The market structure where there are so few sellers that each one needs to watch what the others
are doing is referred to as ...

a) perfect competition.
b) pure monopoly.
c) monopsony.
d) oligopoly.

2. In economic theory, perfectly competitive firms and monopolists:

a) set price equal to marginal cost to decide the level of output.


b) maximize profits where MR = MC.
c) face downward-sloping demand curves.
d) are able to set prices, depending on “what the market will bear.”
e) none of these.

3. A monopoly is most likely to emerge and persist when:

a) very small investment is required for entry into the market.


b) the demand for its output is relatively elastic.
c) firms have U-shaped average cost curves.
d) fixed costs are small relative to total costs.
e) the advantages of bigness are large relative to market demand.
4. Suppose that the graph above represents the market situation for a monopolist. What would each
curve represent?

a) A is marginal revenue, B is the demand curve, and C is marginal cost


b) A is marginal cost, B is the demand curve, and C is marginal revenue
c) A is the demand curve, B is marginal revenue, and C is marginal cost
d) A is marginal revenue, B is marginal cost, and C is the demand curve
e) A is marginal cost, B is marginal revenue, and C is the demand curve

5. Suppose that the graph above represents the market situation for a monopolist. What will be the
equilibrium price and quantity?

a) Price will be P0 and quantity will be Q0


b) Price will be P1 and quantity will be Q0
c) Price will be P2 and quantity will be Q0
d) Price will be P0 and quantity will be Q1
e) Price will be P1 and quantity will be Q1

6. Which one of the following is not a condition of oligopoly?

a) Each seller can influence the market price.


b) Each firm must consider the behavior of its rivals.
c) The market is dominated by a few sellers.
d) Entry into the market is difficult.
e) Each firm faces a perfectly elastic demand curve.
7. The traditional microeconomic model cannot be extended to explain behavior in which of the
following market structures?

a) Oligopoly
b) Pure monopoly
c) Natural monopoly
d) Perfect competition

8. The analysis of oligopolistic behavior is difficult because

a) there are few real-world examples of oligopolies for economists to study.


b) oligopolists make decisions independently of each other.
c) firms in oligopolistic industries react to each other's behavior in many ways.
d) economists have paid little attention to the topic in recent years.
e) oligopolistic firms are usually run by people as wild and unpredictable as Microsoft’s
Bill Gates.

For Questions 9 and 10, refer to the table below.

Firm 2’s Options


Firm 1’s Options

A B
low profit loss
A
low profit high profit

high profit loss


B
loss loss

9. Suppose the table above represents the payoff matrix for two firms in duopoly, who are
“noncooperative.” Which one of the following statements is true?

a) The firms will collude.


b) If both firms choose option B, they will both make some profit.
c) Choosing option B would make Firm 2 better off, regardless of what Firm 1 does, than would
choosing option A.
d) Choosing option A would make Firm 1 better off, regardless of what Firm 2 does, than would
choosing option B.
e) Firm 1 will choose option A because it guarantees a high profit.
10. Suppose the table above represents the payoff matrix for two firms in duopoly who are
“noncooperative.” Which of the following is true?

a) Both firms will choose option A.


b) Firm 1 will choose option B, and Firm 2 will choose option A.
c) Firm 1 will choose option A, and Firm 2 will choose option B.
d) Both firms will choose option B.
e) None of the above.

11. If two noncooperative firms face a “prisoner's dilemma”-type duopoly situation in regard to setting
their prices high or low, which of the following is true?

a) The companies will end up colluding, pricing high to keep profits up.
b) The companies will end up at a situation that is worse for them, than what they could
reach if they were able to communicate and cooperate.
c) One company will gain large profits while the other suffers from low profits.
d) Both companies will end up with high profits.
e) None of the above.

12. A price war is most likely to occur in which of the following market structures?

a) Perfect competition
b) Oligopoly
c) Pure monopoly
d) Natural monopoly

13. Which one of the following is not a condition of perfect competition?

a) Numerous small buyers and sellers


b) Firms’ production functions display increasing returns
c) All units sold are identical
d) Producers can freely enter or exit the market
e) Buyers and sellers have perfect information

For Questions 14-16, refer to the graph below.


14. In the graph above, the firm maximizes its profits at what quantity of production?

a) Point A
b) Point B
c) Point C
d) Point D
e) Point E

15. In the graph above, the firm loses the most money at what quantity of production?

a) Point A
b) Point B
c) Point C
d) Point D
e) Point E

16. In the graph above, the firm makes zero profits at which two points?

a) Points A and B
b) Points B and C
c) Points C and E
d) Points A and E
e) Points B and E

17. When a firm sets marginal cost equal to marginal revenue, it ...
a) maximizes net social benefits.
b) maximizes externalities.
c) minimizes costs.
d) maximizes economic profits.
e) minimizes net social benefits.

18. A firm should continue to operate in the short-run as long as its revenues cover at least its …

a) total costs.
b) marginal costs
c) fixed costs
d) variable costs
e) transaction costs.

Use the following graph to answer Questions 19-22. The graph illustrates the cost structure of an
idealized perfectly competitive seed-producing firm.
2

1.8

1.6
Marginal
Cost and Price ($)

1.4
Cost
1.20
1.2

1 Average Total Cost


0.90
0.8
Average
0.60
0.6 Variable Cost
0.4

0.2

0
0 20 40 60 80 100 120

Quantity of Seed Packets

19. If the market-determined price of seed packets is currently $1.20, which of the following is true?

a) The firm will be considered “highly competitive” by economists, since it is able to command
a good price for its output.
b) The market for seed packets is in long-run competitive equilibrium.
c) We would expect new firms to enter this market, in order to take advantage of the
economic profits.
d) We would expect prices in this market to rise in the future, as the exit of firms decreases
market supply.
e) None of the above.
20. If the market-determined price of seed packets is currently $0.60, which of the following is true?

a) No firms would stay in this industry, since the price is so low.


b) The market for seed packets is in long-run competitive equilibrium.
c) We would expect new firms to enter this market, in order to take advantage of the
economic profits.
d) We would expect prices in this market to rise in the future, as the exit of firms decreases
market supply.
e) None of the above.

21. When the market is in long run competitive equilibrium, this firm will produce …

a) no seed packets—it will go out of business


b) about 60 seed packets
c) between 80 and 100 seed packets
d) more than 100 seed packets
e) You can’t tell from this graph.

22. When the market is in long run competitive equilibrium, the price of seed packets will be …

a) $0.60
b) Anywhere between $0.60 and $0.90
c) $0.90
d) Anywhere between $0.90 and $1.20
e) $1.20

23.A seller in a perfectly competitive market is a…

a) monopolist.
b) monopsonist.
c) price taker.
d) price maker.
e) None of the above

24. The difference between economic and accounting costs is the inclusion of …

a) private costs.
b) external costs.
c) labor costs.
d) opportunity costs.
e) depreciation costs.

25. Economics defines the “long run” as a time period where ...
a) fixed costs must be paid.
b) all but one input are variable.
c) all inputs are fixed.
d) output is variable.
e) all inputs are variable.

26. The relationship between a firm’s level of maximum output and level of inputs is given by ...

a) a marginal cost curve.


b) a production function.
c) a production possibilities frontier.
d) an average cost curve.
e) an economic cost curve.

27. Which one of the graphs below could represent a total product curve with constant returns to scale?

a) Graph a
b) Graph b
c) Graph c
d) Graph d
e) Graph e
Use the following table to answer Questions 28 – 29. The table represents the MPG
corporation's costs of making quarts of gasoline additive. Note that MPG has total fixed
costs of $7. Assume that the company can only produce whole numbers of output.

Quantity Total Cost Marginal Cost

7 ---
0
16 9
1
24
2 (B)
7
3 (A)
39 8
4
49 10
5
61 12
6
75 14
7
28. In the above table, the number that should replace (A) is

a) 26
b) 27
c) 29
d) 31
e) 34

29. In the above table, the number that should replace (B) is

a) 2
b) 8
c) 8.5
d) 12
e) 24

30. Economics has traditionally assumed that a consumer’s problem is to maximize his or
her …

a) income.
b) profits.
c) consumption.
d) utility.
e) aspirations.
For Questions 31 and 32, refer to the graph below.

8
Quantity of Movie Tickets

0 1 2
Quantity of Books

31. Suppose the solid line in the graph above illustrates Michaela’s budget line. We can conclude
that …

a) if Michaela’s income is $80, the price of books must be $80.


b) if Michaela’s income is $80, the price of movie tickets must be $12.
c) Michaela could afford to buy 8 movie tickets and 1 book.
d) if Michaela’s income is $40, the price of movie tickets must be $5.
e) both A and D.

32. If Michael’s budget line changes from the dashed line to the solid line in the above graph, this
could be caused by …

a) a decrease in her income.


b) an increase in her income.
c) an increase in the price of books.
d) an increase in the price of movie tickets.
e) the fact that Michaela decides she likes books less than before.

33. Diminishing marginal utility means that ...

a) the more money a consumer spends, the less is available to purchase other goods.
b) money should transferred from wealthy people to poor people.
c) utility cannot be compared across different people.
d) additional units of consumption produce less additional utility than previous units.
e) utility always increases through additional consumption.
34. The term “comparative advantage” means that ...

a) one alternative in a comparison has a clear advantage over the other alternative.
b) trading benefits one party more than another.
c) one economic actor can produce something with a lower opportunity cost.
d) trading reduces society’s production possibilities frontier.
e) cost-cutting measures should be pursued as long as the marginal benefits exceed the
marginal costs.

35. The principle of comparative advantage says that ...

a) you should specialize in producing goods for which your opportunity costs are relatively low.
b) you should specialize only if you can produce something at a lower cost than other
economic actors.
c) you should compare prices before you buy a good or service.
d) trading is generally prohibited by high transactions costs.
e) you should specialize only to the point where the marginal benefits equal the marginal
costs.

36. Every evening, Carol and John have to wash the dishes and put two children to bed. They
have found that the quickest way to complete these tasks is to have Carol wash the dishes and
John put the children to bed. Which of the following statements is false?

a) Carol has a comparative advantage in dishwashing.


b) Carol has a comparative advantage in putting kids to bed.
c) Carol specializes in dishwashing.
d) The couple benefits from the division of labor.
e) It would take the couple longer if each parent washed half the dishes and put one kid
to bed.

37. Consumer surplus is the area …

a) below the demand curve but above the supply curve.


b) above the demand curve but below the supply curve.
c) below the demand curve but above price.
d) above the demand curve but below price.
e) below price but above the supply curve.

38. Producer surplus is equivalent to …

a) marginal costs.
b) total costs.
c) marginal benefits.
d) social welfare.
e) profits.
39. Refer to the figure above that shows the production-possibilities frontier of
countries X and Y. The points on each axis represent the maximum quantities that
each country could produce if they specialized entirely in one of the goods. Which
country has the absolute advantage at producing rice?

a) Country X
b) Country Y
c) Both X and Y
d) Neither X nor Y
e) There is not enough information to answer the question.

40. If the demand for coffee beans is inelastic, then a rise in the price of those beans will
cause the coffee farmers’ total revenues to …

a) rise.
b) fall.
c) stay the same.
d) fluctuate wildly, driving farmers into bankruptcy.
e) none of these.

41. Suppose we know that the price elasticity of demand for organic carrots is 1.5. If a grocer
decreases the price of organic carrots by 12%, what would we expect to happen to the quantity of
organic carrots purchased?

a) Decrease by 18%
b) Decrease by 6%
c) Increase by 6%
d) Increase by 8%
e) Increase by 18%
42. If apples are a normal good, then...

a) an increase in the price of apples will increase demand for apples..


b) an increase in the price of apples will increase total revenues of apple producers.
c) an increase in income will decrease demand for apples.
d) an increase in income will not affect the demand for apples.
e) an increase in income will increase demand for apples.

Refer to the following graphs for questions 43-50.

a. b. c.
New
price price price
Supply
Supply Supply Supply

New Supply

Demand
Demand Demand
New Demand New Demand
quantity quantity quantity

price d. price e.
New Supply
Supply Supply

New Supply

New Demand New Demand


Demand Demand

quantity quantity

43. Which graph illustrates a case in with the equilibrium price and quantity both clearly fall?

a) a
b) b
c) c
d) d
e) e

44. Which graph illustrates a pattern of shifts where the equilibrium price clearly rises but the
change in equilibrium quantity might not be predictable?

a) a
b) b
c) c
d) d
e) e
45. Rapid forest growth makes paper less expensive AND electronic books become more popular
with readers. Which graph describes the effect on the market for hardcopy books?

a) a
b) b
c) c
d) d
e) e

46. Because their debts are rising severely, many more consumers decide that their old cell phones
are good enough to serve their needs. Which graph describes the effect on the market for new cell
phones?

a) a
b) b
c) c
d) d
e) e

47. Suppose there are technological advances in cattle ranching AND growing fears of ringworm and
other parasites makes walking barefoot less popular. Which graph describes the effect on the
market for leather shoes?

a) a
b) b
c) c
d) d
e) e

48. Suppose there is a bad cotton harvest AND global warming makes the wearing of cotton clothing
more popular. Which graph describes the effect on the market for cotton clothing?

a) a
b) b
c) c
d) d
e) e

49. Potential buyers AND potential sellers of corporate stocks begin to expect that stock prices will
rise in the future. Which graph describes the effect on the market for corporate stocks?

a) a
b) b
c) c
d) d
e) e
50. Due to a bad harvest, wheat supplies fall, causing the supplies of flour used in making bread to
fall. Which graph describes the effect on the market for bread?

a) a
b) b
c) c
d) d
e) e

Show All Your Work Problems

(26 points)1. Use the following table to answer Questions .

Marginal Profit
Selling Total Cost
Price Total Marginal Cost
Quantity of Revenue Revenue ($)
Scooters ($) ($) ($) ($) ($)

0 1000 --

1 1700 1600

2 1400 2000

3 1100 2500

4 800 3100

A) Fill in the table.

B) What is the profit maximizing output level?


C) What is the profit maximizing price?

D) What is the maximum profit?

(18 points) 2. A) Fill in the table below.

Quantity of Fixed Variable Marginal


Flashlights Cost ($) Cost ($) Total cost cost Average Cost

0 20

1 20 15

2 20 25

3 20 37

4 20 52

B) When would the firm shut down in long run?


(6 points) 3. Suppose that the supply and demand schedules for bread loafs daily in a small town
is given as follows:

price 1 1.25 1.5 1.75 2 2.25 2.50


Quantity supplied 0 50 60 90 100 110 130
Quantity demanded 160 150 140 120 100 90 80

A) What is the market equilibrium price?

B) What is the market equilibrium quantity?

C) If the market price is $2.25 per loaf, is there a surplus or shortage and how much?